On 10 October 2017, the UK Government published two papers setting out its proposals for the UK's trade and customs policy post-Brexit, namely "Customs Bill: legislating for the UK's future customs, VAT and excise regimes" (see link), and "Preparing for our future UK trade policy" (see link).
The first paper explores the measures that the UK will need to introduce to regulate customs, VAT and excise duties under various Brexit scenarios while the second one discusses the UK's future trade policy more generally. In a nutshell:
- The Customs Bill paper foresees three main options for the future UK/EU customs relationship.
First, a highly streamlined customs arrangement where customs formalities would be reintroduced to UK/EU trade but kept to a minimum so as to minimise resulting disruptions for traders. This option would require that the UK/EU reach an agreement on a number of considerations (not all envisaged in the paper), including a special status for goods crossing the border between Northern Ireland and Ireland.
Second, a new customs partnership where UK/EU trade would not be subject to customs formalities but the UK would retain the possibility of concluding free trade agreements with third countries. Although this option would allow the UK to reach its objective of "frictionless trade" at the Northern Ireland-Ireland border, there are legitimate concerns about whether it could (and if so how) be implemented in practice.
Third, a contingency scenario in the event that the UK would leave the EU without a negotiated outcome on customs arrangements. In this case, the UK would implement unilateral measures to mitigate the negative impact for traders predominantly trading with the EU but would necessarily need to reach an agreement with the EU as regards, among other things, customs formalities at the Northern Ireland-Ireland border.
- The paper on the UK's future trade policy sets out concrete proposals concerning various key aspects of the UK's post-Brexit trade policy.
First, it provides that the UK intends to replicate its existing WTO commitments as set out in the EU's schedules of commitments but overlooks the fact that a number of WTO Members may well request that this be preceded by lengthy negotiations. Further, it appears to acknowledge that the European Commission will continue to act on the UK's behalf until it leaves the EU but does not address potential detrimental consequences for the UK's post-Brexit WTO litigation strategy.
Second, it indicates that the UK will "roll-over" existing EU free trade agreements but fails to address how exactly the UK will go about doing so and the potential complications of that process. Further, it notes that the UK legislation will provide concurrent powers for central government and devolved administrations to negotiate/implement certain free trade agreements, which may conflict with the stated objective that the legislative framework should allow swift negotiation, conclusion and implementation of the said agreements.
Third, it notes that the UK will likely base its trade preferences regime on – at least part of – the EU General Scheme of Preferences.
Fourth, it provides that the UK trade defence regime will likely mirror – to a large extent – the EU rules (even those whose WTO-consistency remain to be tested). It also provides that the UK will be able to continue existing EU trade defence measures by simply conducting reviews thereof, which seems highly questionable under WTO law.
Both papers address different potential options and invite comments from interested parties (by 3 November for issues raised in the Customs Bill and 6 November for those raised in the paper on the UK's future trade policy). Businesses should therefore carefully review the proposals set out in the papers in light of their own particular situation and consider how they may best defend their interests in this process.
The Customs Bill paper The Customs Bill paper develops the two "broad approaches" to a future UK/EU customs relationship announced in the earlier "future partnership paper" on the UK-EU future customs arrangements (see link). These approaches consist of a "highly streamlined customs arrangement" and a "new customs partnership," and would both be preceded by transitional arrangements (called an "interim implementation period"). The paper also addresses the potential consequences of a "contingency scenario" where the UK would leave the EU without a negotiated arrangement. We will examine each of these regimes in turn. Highly streamlined customs arrangement The highly streamlined customs arrangement approach envisages the re-introduction of customs formalities to UK/EU trade while seeking to minimise resulting disruptions for traders through the use of trade facilitation measures to be agreed with the EU. Examples of potential trade facilitation measures contemplated in the paper include (i) simplification of the requirements for moving goods across borders; (ii) reduction of delays at ports/airports; (iii) negotiation of customs cooperation, mutual assistance and data sharing agreements, which would replicate existing levels of UK cooperation in safety and security matters with the rest of the EU; and (iv) adoption of unilateral measures aimed at reducing the time and costs of complying with customs administrative requirements. The paper indicates that the Customs Bill will delegate rather broad powers to the UK Government to implement these facilitations (and any other additional ones) with a view to ensuring "frictionless" trade between the UK and the EU. It can be expected that there will be resistance in Parliament to such broad delegation (often referred to as "Henry VIII powers"). There are clearly limits to how far trade facilitation measures can achieve “frictionless” trade. The only way to remove entirely the administrative burdens associated with customs formalities is not to have them at all, i.e. to enter into a customs union of the type that exists within the EU. Further, for the UK's trade facilitation measures to be fully effective, the EU would need to adopt similar measures and bear any resulting costs, which is something on which the EU has not yet communicated its position and will need to be negotiated. Last, it remains unclear whether the trade facilitation measures would need to be made available in all ports and other "entry points" or only in a number of pre-selected ones in both the UK and EU territories. Moreover, the highly streamlined customs arrangement would not, in itself, allow the UK to reach its objective of avoiding a "hard border" between Northern Ireland and Ireland in line with the nine key principles set out in the UK Government's dedicated position paper (see link). As a result, the paper proposes specific further trade facilitations for the Northern Ireland-Ireland border that would allow smaller traders to continue to move goods with "no new requirements in relation to customs processes." This presents its own challenges. In the absence of an explicit HERBERT SMITH FREEHILLS 10/52069361_1 3 derogation under EU law, such exemption would indeed be highly questionable. Further, any derogation would need to be proportionate and not distort competition, and the exemption for small businesses considered in the paper would thus have to be limited to a carefully defined category of operators and contain safeguards to avoid circumvention. The paper unfortunately does not provide further details as to how the UK proposes to address such issues. New customs partnership The new customs partnership approach envisages UK/EU trade without customs processes at the border outside of a traditional customs union arrangement. This would consist, for instance, in the UK mirroring the EU's customs tariffs/rules of origin for goods that enter the UK to be consumed in the EU market while imposing its own customs tariffs/rules of origin for goods destined for the UK market. The paper indicates that a "robust enforcement mechanism" would be required to ensure that goods entering under the UK's customs tariffs/rules of origin are not onward shipped to the EU. As a consequence, there would be no need for customs controls between the UK and the EU, which would enable the border between Northern Ireland and Ireland to continue to be seamless in relation to customs. The new customs partnership approach therefore appears to be the UK's preferred option to reach its objectives of “frictionless trade” and no “hard border” between Northern Ireland and Ireland. That being said, the paper does acknowledge that this would be an "innovative and untested approach" (which an EU official described as "magical thinking" in August 2017) that would require extensive negotiations with the EU as well as further clarifications as to how it would work in practice. For instance, while the system appears reasonably straight-forward in the case of finished goods, it seems that significant complications could arise in the case of components to be integrated in products that are ultimately exported to the EU. The creation and operation of a tracking system to cover the entirety of trade in goods would furthermore constitute a significant undertaking that would impose material additional costs and burdens on economic operators. Any repayment system on the other hand could require significant additional administration, potentially to be handled alongside import VAT. Furthermore, the EU may be reluctant to rely on the administration by the UK alone of a customs arrangement that seems considerably more complex and vulnerable to fraud than the customs regime applicable within the EU (which is not without its challenges) over which the EU institutions have direct enforcement powers. Finally, the proposal may trigger opposition from within the EU because it would seemingly only benefit producers in the UK – these could remain virtually within the EU customs union whereas EU producers may not be able to benefit from a similar type of access to the UK market (unless the EU itself were to apply the same system and associated enforcement mechanism). Interim implementation period The paper indicates that both the highly streamlined customs arrangement and the new customs partnership should be preceded by an interim implementation period. Such period would be time-limited (most likely two years as proposed by the UK) and would aim to "avoid any cliff-edge as the UK moves from the current relationship to a future partnership" and "allow for a smooth and orderly transition." The paper further indicates that the interim implementation period would maintain the current status quo between the UK and the EU so that "businesses and people in the UK and the EU only have to adjust to a new customs relationship once." This is confirmed, amongst other things, by the fact that the paper appears to conclude that the Court of Justice of the EU will retain direct jurisdiction in the UK during the interim implementation period (in line with Ms. May's comments to the House of Commons on 9 October 2017). As a result, what the UK Government seems to be proposing is to effectively remain within the EU customs union for a certain period, although it would wish to pursue new trade negotiations with other countries during this time. Whether this would be acceptable for the EU remains to be seen. However, the UK is, arguably, already able to engage in trade negotiations whilst being a member of the EU customs union so long as it does not seek to implement any agreements reached until after it leaves. The real problem is that no third country is likely to be willing to negotiate a trade agreement with the UK until its WTO commitments and relationship with the EU are clarified. Contingency scenario The contingency scenario is considered in the event that the UK would leave the EU without a negotiated outcome on customs arrangements. Under this scenario, the UK would establish (using powers delegated to the HERBERT SMITH FREEHILLS 10/52069361_1 4 Government) a standalone customs regime from day one (including setting tariffs and quotas, and establishing a goods classification system) in line with its WTO obligations. This would concretely mean that (i) traders who already import from outside the EU should see no change in the customs declaration procedures for these imports, and (ii) traders who currently trade only with the EU will be subject to customs declarations and checks for the first time (e.g. traders will need to be registered, imported goods will be liable to customs duty and import VAT, certain goods may require import/export licences, and traders exporting to the EU would have to submit an export declaration). The paper stresses that the UK Government is very well aware of the significant impact that this scenario would have on businesses trading with the EU and is therefore considering potential solutions to mitigate such impact. These potential solutions include: • Facilitating roll-on roll-off port operations by, for instance, requiring that consignments are pre-notified to customs and implementing the unilateral trade facilitation measures mentioned above; • Ensuring seamless movement of goods by air, maritime or rail freight by aligning the customs arrangements for UK/EU trade with those currently applicable to non-EU goods; • Ensuring that the rules governing the movement of goods by individuals via travel to the UK from the EU are kept as close as possible to those currently applicable and that, as a result, people traveling to the UK from the EU do not have to pay any UK tax on the goods they bring with them for personal use. For VAT on goods sent as small parcels (i.e. e-commerce), the paper reaches the conclusion that allowing parcels valued GBP 15 or less to be sent from the EU without VAT being payable (as is currently the case for small parcels from non-EU countries) would potentially undermine the UK high street and therefore envisages special collection mechanisms, including technology-based solutions, for taxes on parcels valued below GBP 135 with a view to minimising consumer burden when the parcel is delivered. • Devising new "flexible and imaginative" border arrangements that would avoid the return of a hard border between Northern Ireland and Ireland. The paper does not expand on what these arrangements could be but nonetheless notes that "[t]he nature of the border clearly means that all sides must aim for an agreed, reciprocal solution," which indicates that – at least as regards this issue – the contingency scenario will necessarily have to include some type of agreement with the EU. The paper on the UK's future trade policy This paper sets out concrete proposals for the UK's future trade policy more generally. These proposals concern, inter alia, (i) the UK's position within the WTO; (ii) the UK's free trade agreements; (iii) the UK's unilateral trade measures; and (iv) the UK's trade defence regime. The UK's position within the WTO The UK intends to, as far as possible, replicate its existing commitments as set out in the EU's schedules of commitments and submit these for certification in the WTO ahead of leaving the EU so as to minimise disruption to trade. This confirms that the UK takes the view that its departure from the EU (and the setting up of its own schedules of commitments) should not trigger lengthy negotiations with other WTO members whose role would be limited to certifying the UK's new schedules of commitments. However, other WTO Members will need to accept this view and not require that the UK enter into formal negotiations before agreeing to the said schedules. A relevant consideration in that regard concerns the EU's current tariff rate quotas (TRQs). Although not addressed in the paper, the UK and the EU have recently informed the other WTO Members that they intend to divide up the EU's current TRQs on the basis of "trade flows under each tariff-rate quota." Unsurprisingly, some WTO Members have immediately rejected the proposed approach as insufficient and called for negotiations since the EU/UK proposal would limit their existing market access (at present they can export the whole of a TRQ to the UK or elsewhere in the EU and will lose this freedom under the UK/EU's proposed approach). This indicates that establishing the UK's schedule of concessions will require negotiations and may thus prove to be more difficult than assumed in the paper. Further, the UK appears to accept that the European Commission will continue to manage WTO disputes on its behalf until it leaves the EU. HERBERT SMITH FREEHILLS 10/52069361_1 5 As a result, the UK will likely not join ongoing disputes as a third party in its own right and/or co-initiate cases of interest with the EU (e.g. against the US trade defence measures on Bombardier aircrafts produced in the UK) before it leaves the EU. This raises potential concerns regarding the UK's ability to join ongoing cases as a third party following Brexit because of the stringent applicable statutory deadlines (i.e. third parties must notify their interest in participating in a case within 10 days from the date of establishment of the panel). This also means that following Brexit the UK might have to initiate a number of disputes duplicating those of the EU (where there is a UK-specific interest) so as to be able to benefit from potential favourable rulings. These concerns/considerations are not addressed in the paper. Last, the UK announces the adoption of legislation that would allow it to accede to the WTO Government Procurement Agreement (without addressing the dedicated accession process applicable to all new joiners). The UK also announces its support for trade facilitation (and seem to assume that it will automatically remain a party to the Trade Facilitation Agreement), negotiations for an Environmental Goods Agreement and the Trade in Services Agreement. This indicates that the UK will generally follow the EU's approach to WTO plurilateral agreements by supporting the negotiation and conclusion of agreements aimed at further liberalising trade between like-minded WTO Members. The UK's free trade agreements The UK will seek to both (i) ensure continuity in its current trade and investment relationships, including those covered by EU free trade agreements, and (ii) negotiate and implement new trade agreements. As regards continuity in its current trade and investment relationship, the paper does not specify how exactly the UK will go about continuing (or “rolling-over”) existing EU free trade agreements. Although the UK and any third country that has concluded a free trade agreement with the EU could – in principle – conclude a new agreement very similar to that which already exists with the EU at the same time as the UK's withdrawal from the EU-third country agreements takes effect, such process may not be as simple as envisaged in the paper. Indeed, while many of the obligations in these agreements can easily be copied into the new UK-third country agreement, it will be more difficult to do so for others. For instance, quantitative restrictions (including TRQs) would need to be recalculated to reflect the changed situation. Given the WTO Members' reaction to the UK/EU's proposed approach to reallocate the EU's TRQs at WTO level, it cannot be excluded that third countries that have concluded a free trade agreement with the EU may request further concessions should the UK and the EU decide to divide up the TRQs provided for under the said agreement. Further, a number of the EU's preferential trade agreements with, in particular, developing third countries include financial obligations on the part of the EU. As with TRQs, the exact share of the UK's contribution to these types of program (if any) will have to be reassessed and agreed upon. As regards the negotiation and implementation of new trade agreements, the paper notes that the UK legislation will provide concurrent powers for central government and the devolved administrations to implement the agreements where they touch on devolved matters. This may conflict with the further objective that the legislative framework should also provide powers to negotiate new agreements and to move quickly from signing to implementation and ratification. The paper announces that negotiations may start during the transition period but that the UK "would not bring into effect any new arrangements with third countries which were not consistent with the terms of [its] agreement with the EU." The UK's unilateral trade measures Consistent with the general policy of ensuring continuity and therefore certainty, the UK will base its trade preferences for developing countries on the EU General Scheme of Preferences (GSP) regime, which provides for: • Duty-free-quota-free access for the 49 Least Developed Countries (LDCs) on all goods other than arms and ammunition (the ‘Everything But Arms’ scheme, or EBA). • For the next tier of developing countries, classed as Lower Middle Income, the EU offers a mix of reductions and full removal of tariffs on around two-thirds of tariff lines (standard GSP). • An enhanced tier for economically vulnerable countries that are implementing 27 international conventions on human and labour rights, environment and good governance; the two-thirds of tariff lines covered by GSP are reduced to zero (GSP+ for 9 countries). Importantly, the paper notes that the first tier (EBA) will be maintained whereas there is only an "aim to maintain" the second and third tiers. HERBERT SMITH FREEHILLS 10/52069361_1 6 The UK's trade defence regime The UK rules will likely largely mirror the EU WTO+ rules, i.e. rules not explicitly provided for in the relevant WTO Agreements. For instance, the UK proposes to introduce (i) anti-circumvention rules (i.e. rules aimed at tackling circumvention of existing trade defence measures and whose consistency with WTO law remains untested); (ii) a rule similar to the lesser duty rule (i.e. the rule that allows the duty rate to be based on the injury margin); and (iii) a test similar to the Union interest test (i.e. an economic test that allows authorities not to impose trade defence measures in case of injurious dumping/subsidisation where such measures would not be in the UK's overall interest). Apart from the anti-circumvention rules, the proposed rules should not raise any concerns regarding their WTO-consistency. The UK also appears to take the view that it will be able to "continue" existing EU trade defence measures by merely conducting "reviews" of those that "are essential to UK business and will need to be carried forward." This appears highly questionable under WTO law. WTO law provides for two types of reviews, namely so-called interim reviews (following a change in circumstances warranting an examination of whether the continued imposition of the measures is warranted) and so-called expiry/sunset reviews (to assess whether the expiry of the measures would likely lead to continuation or recurrence of injurious dumping/subsidisation at the end of the period of imposition of the measures). These reviews must, in principle, be conducted by the authorities that conducted the initial investigation and imposed the initial measures. Whether existing EU measures are warranted for the UK only would therefore likely require brand new investigations (if only because they were initially imposed on the basis of EU-wide data/circumstances). Any attempt to simply continue existing EU trade defence measures on the basis of reviews would therefore likely be challenged at WTO level. Consultation of stakeholders The Customs Bill paper and the paper on the UK's future trade policy conclude that the UK Government expects businesses and other stakeholders to both react to the different approaches/proposals considered and respond to specific questions aimed at assisting the UK Government in further refining its position. Businesses (and any other stakeholders) should therefore consider the impact of each of the proposed approaches on their specific operations and make sure to provide the UK Government with any relevant information that would ensure that their best interests are taken into account in the process. Comments on and responses to the specific questions raised in the Customs Bill paper should be sent to CustomsStakeholders@hmtreasury.gsi.gov.uk by 3 November; comments on and responses to the specific questions raised in the paper on the UK's future trade policy should be sent to firstname.lastname@example.org by 6 November. Our team of international trade law experts would be happy to assist you in this process.